Ordering Strategy for Retail Companies under the Option Contract of Supply

This paper studies the ordering strategy for retail companies in the two-stage supply chain for perishable products consisting of a retailer and a risk-neutral supplier under option contracts. Through building the total profit model and the retailer profit model in the supply chain under option contracts, retailers´ ordering policy and suppliers´ pricing strategy are obtained when the supply chain profit is optimal. The retailer´s attitude towards risk directly influences its ordering decisions, the paper takes the retailer´s attitude to risk into consideration and use conditional risk value to measure the retailer´s risk aversion. It is shown that the optimal fixed order quantity depends on the spots wholesale price, the option purchasing price, the option striking price and the coefficient of risk aversion of retailers jointly.